BVNRY - Emergent BioSolutions: Making A Big Bet On Narcan

2023-07-21 05:42:00 ET

Summary

• Today, we take a look at a life sciences company called Emergent BioSolutions.
• The company is making a big bet on the NARCAN marketplace, selling one business and getting FDA approval for a new OTC product.
• An investment analysis around Emergent BioSolutions Inc. follows in the paragraphs below.

When the choice is debt or death, best borrow .”? George R.R. Martin,

Today we put Emergent BioSolutions Inc. ( EBS ) in the spotlight. The company just appointed a new interim CEO last month. The company recently made an important divesture. This shored up its balance sheet and will allow it to concentrate on building its key franchise, which recently had an important product approved by the FDA. An analysis follows below.

Company Overview:

Emergent BioSolutions is a life sciences company headquartered just outside of Washington, D.C. The company has a number of products on the market, including a recently approved over-the-counter NARCAN, which is used to reverse drug overdoses. The company also operates as a contract development and manufacturing organization or CDMO for other drug concerns. The shares currently trade just under $7.50 a share and sport an approximate market capitalization of $365 million.

Here is how management breaks down its business lines:

• Anthrax MCM — comprises potential contributions from AV7909, BioThrax, Anthrasil and raxibacumab
• NARCAN — comprises contributions from NARCAN Nasal Spray
• Smallpox MCM — comprises potential contributions from ACAM2000, VIGIV and Tembexa
• Other Products — includes potential contributions from BAT, RSDL, Trobigard, Vaxchora and Vivotif
• CDMO — comprises service and lease revenues from the contract development and manufacturing business

In mid-May, Emergent completed the sale of its Travel Health Business to Bavarian Nordic (BVNRY) for a $270 million upfront payment, and it can also earn $110 million in future potential milestone payouts. Bavarian Nordic acquired the rights to both Vivotif, a typhoid vaccine and Vaxchora, a cholera vaccine, as well as manufacturing facilities in Germany and R&D assets in California in this deal. This deal was first announced late in 2022.

The company is making a big bet on its NARCAN franchise, which was enhanced by the FDA approval of its over-the-counter NARCAN nasal spray at the end of this March. The NARCAN franchise already provides some 70% of the company's overall ongoing revenues as of the close of the first quarter. The recently approved NARCAN® Nasal Spray will launch this summer.

First Quarter Results:

On May 9th, Emergent BioSolutions reported its first quarter results . The company had a GAAP loss of $3.65 a share as revenues fell just over 45% to $165 million. Net loss for the quarter was $183 million. Its adjusted EBITDA net loss was $101 million.

Revenues from Anthrax MCM decreased $87.5 million compared to the same year ago, while sales of Smallpox MCM decreased $16.1 million from 1Q2022. Both these products are subject to considerable timing issues. The company recently received a notice of intent from the U.S. government to procure its smallpox vaccine.

Revenue from CDMO business decreased $38.4 million from the first quarter of 2022. Half of this was related to a halt in manufacturing under the Janssen contract in 2022. The one bright spot as far as sales growth was in its NARCAN franchise, which saw revenues rise $7.3 million.

Management provided full year guidance calling for a net loss of between $135 million and $185 million on revenues of between $1 billion to $1.1 billion. Leadership bumped up its full year sales forecast from NARCAN franchise from $290 million to range of $310 million to $360 million thanks to the approval of its OTC product. Management also increased its FY2023 adjusted EBITDA forecast by $100 million to $150 million higher than the prior range due mainly to the disposal of the Travel Health business.

Analyst Commentary & Balance Sheet:

After first quarter results came out, TD Cowen lowered their price target from $25 to $15 and maintained its Hold rating. Benchmark Co. reissued its Buy rating and $22 price target.

Approximately 17% of the outstanding float in the shares are currently held short. There has been no insider activity (either buying or selling) in the stock so far in 2023. Emergent BioSolutions ended the first quarter of this year with just over $400 million in cash and marketable securities on its balance sheet, leaving it with a net debt position of nearly $1 billion at the end of the quarter. In mid-May, the company raised approximately $150 million via a share sale. Its cash balance will be further enhanced by the $270 million upfront payment from Bavarian Nordic that was triggered by the closing of the sale of Emergent's Travel Health business.

Verdict:

Emergent BioSolutions lost $2.23 a share in FY2022 on revenues of $1.12 billion. The current analyst firm consensus has that loss dropping just below a buck a share in FY2023 even as sales rise three percent. A loss of just 15 cents a share is projected in FY2024 as revenues rise another three percent.

Management believes that greater access to NARCAN nasal spray as a result of the OTC designation will greatly expand the franchise and also will help save countless lives. Leadership is targeting a consumer out-of-pocket price of less than $50 a box of two, four milligram doses. The product will be made available through pharmacies, convenience stores, vending machines, online retailers and other channels. This is the first and only opioid overdose reversal medicine approved for over-the-counter for the time being. This space will get more competitive in the future, but management does not expect new entrants until early to mid-2024. Hopefully, that gives Emergent time to establish its product through first mover advantage.

Unfortunately, the use of NARCAN has grown exponentially in recent years as ODs from fentanyl have roughly doubled since 2019 to some 75,000 Americans a year. Overall, the country had nearly 110,000 drug overdose deaths in 2022. Emergent first got into this business by acquiring Adapt Pharma in 2018 for $635 million as well as up to $100 million in potential sales milestones which were exhausted by 2022.

The direction of the stock is going to be primarily driven by how fast its new OTC product gains traction. Investors probably won't get a fuller picture on that until fourth quarter results. Therefore, I am passing on any investment recommendation on EBS at this time. However, this is a story we will circle back on early in 2024 as a more complete picture 'emerges' around company's prospects.

The one who hugs a debt also shakes hand with a danger .”? Amit Kalantri

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